Vale’s Tax and Regulatory Woes: Much Ado About Nothing?

By Ben Levisohn

Vale’s (VALE) shares have fallen 21% this year and more than just plunging commodity prices are to blame. But two of the issues–the Brazilian miner’s tax dispute with the government and the potential impact of still-unspecified regulations–might not be as big a problem as investors think. At least that’s the opinion of JPMorgan’s Rodolfo De Angele and Mandeep Singh Manihani in a report released yesterday.

Reuters

What’s been happening? Vale has been disputing a tax bill on foreign revenue that could total billions of dollars. Investors were hoping Brazil’s Supreme Court would make the bill disappear, but instead sent it back to the lower courts. The government, meanwhile, is developing new regulations that could involve a “special participation tax,” another overhang.

De Angele and Manihani, however, aren’t too worried. For starters, they see don’t expect Vale to pay the full $15.5 billion. In the worst case, the company would negotiate a settlement and agree and pay the full principal and a piece of the penalty. They figure that will be about $6.5 billion spread out over five years. They also note that “there is still a decent chance that the company will pay nothing at all.”

Meanwhile, they see momentum for a special participation tax–one that requires them to pay a share of sales or profits to the government–slowing. Instead, De Angele and Manihani now expect royalties to go from 2% to 4%, a much smaller hit when a new code is released sometime in late April or early May.

Even the commodity plunge seems priced into the stock, De Angele and Manihani say. Their current model suggests that shares of Vale are priced for $75/ton iron ore, below the current price of $139.40 and JPMorgan’s forecast for $80 by 2019. “The results of the exercise imply that investors are currently pricing in an extremely bearish view on iron ore prices,” they say.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.